Chapter 41 Chapter 9 Worldwide Sourcing

2 A Clarification on Terms International Sourcing (Opportunistic) Global Sourcing Integration of Systems Integration of locations Integration of functions Worldwide Sourcing

3 Why Worldwide Sourcing? Cost Differentials Quality Access to only source available Better Technology or Processes The judgment that the best supplier is a foreign firm

4 Key Markets for Sourcing Abroad Taiwan South Korea Philippines Malaysia China* Romania Hungary Mexico* Brazil* India*

5 Barriers to Worldwide Sourcing Lack of knowledge about potential foreign sources Lack of understanding on procedures and documents Risks Long lead times Uncertain outcomes Lack of control Communications Inventory Foreign Exchange Higher cost of doing business Political Language, cultural, legal, and business practice barriers

6 Comments on certain barriers Cultural (values and behavior) Legal UN’s Convention on the International Sale of Goods (CISG) WTO members Business practice barriers Dun and Bradstreet Country Analysis Reports Language

7 Language and communication issues Adjust your speaking style Slow down Use extra presentation graphics Write down numbers Watch your language (profanity, jargon, acronyms) Vocabulary Watch your body language Know when you reach an agreement Document decisions in writing

8 Language and communication issues The two largest differences in communication styles across countries are message speed and level of content Americans generally give fast messages with the conclusions expressed first. This style is inappropriate in many countries, particularly Europe High-content communication assumes the receiver already understands a great deal of background information

9 A firm can approach worldwide sourcing in one of two ways... Use trade intermediaries (specialists) Easiest, simplest, less risky, and potentially the most cost effective Deal directly with foreign suppliers Need a well-staffed worldwide sourcing organization Avoid mark-up of intermediary, but …

10 Trade Intermediaries Import Merchants Manufacturer’s representatives Import Brokers Trading Companies They add administrative costs but lower the burden and the risks of unforeseen problems

11 Trade Intermediaries Can eliminate some barriers to worldwide sourcing Where to source How to source Can manage or reduce other barriers Risks Language, legal, cultural, business practice barriers

12 Dealing directly with foreign sources Eliminates mark-ups and fees Risky if firm doesn’t have a well-trained worldwide sourcing staff IPO in country Requires an investment in time and travel Trial orders are common to establish a performance record Should only be pursued after careful consideration of the intermediary option

13 Obtaining information about suppliers in other countries Dun and Bradstreet “Supplier Management Services” World Marketing Directory Marconi’s International Register United States Department of Commerce Major-city banks Foreign Trade Consulates U.S. Embassies overseas Internet: Foreign trade agents

14 The issue of Foreign Exchange Risk Denominate the contract in dollars? Share the risk? Firm’s Finance Department should get involved Track currency movements; trends and forecasts Engage in hedging S’pose I denominate a contract with a firm in Mexico in Pesos: Negotiated price = 10,000,000 Pesos 1. $1 = 10 Pesos  $1,000, $1 = 9 Pesos  $1,111,111 (A weakened dollars creates an 11.1% increase in cost for the buyer firm)

15 The issue of Countertrade Countertrade is a marketing department issue Purchasing is only one option to the dilemma This issue arises when a foreign government requires you to buy (or trade) their exports for what you sell to them (not necessarily at 100%).

16 Global Sourcing: Moving toward a process International purchasing Global Sourcing Price focused, or No suitable domestic supplier exists Reactive and uncoordinated among buying units and functional areas A strategy for integrating full service foreign suppliers during new product development Integration of a firm’s locations, internal functional areas, and information and engineering systems with foreign suppliers

17 Concept of a Full Service Suppliers (FSS) A Full Service Supplier will... Participate in the design and development of customer products Provide technical assistance to the customer Optimize delivery and logistics activities Offer flexibility and commitment to meet customer needs Stand behind his material or service in every way The shift in responsibility to the supply base for partial responsibility for engineering, research, and development has been coined as Full Service Suppliers or FSS

18 Managing a global supply chain Noon Cincinnati (Program Headquarters) 8 5 Los Angeles Supplier Brazil Supplier 8 5 Mexico Supplier 8 5 Taiwan Supplier 8 5 Romania Supplier 8 England Supplier 8 Australia Supplier 8 5 PMAM

19 Benefits of Global Sourcing Global suppliers, global processes, and global strategies are an integral part of a firm’s supply management efforts Generates coordinated, worldwide design, development, procurement, production, and logistics activities

20 Let’s move on